Article by Carl Blake
The number of foreclosures is all over the news, and comes up often in regular discussion. The listings of foreclosures in newspapers sometimes takes up multiple pages, and there are even tax ramifications of foreclosure. But what is a foreclosure, and why is it important that I know about it?
Foreclosure is a process that a lending institution, usually a bank, goes through to repossess an item that was used as collateral on a loan. Right now in the news and at the forefront of a lot of people’s minds is home foreclosure, which is when a bank repossesses a house because of a failure by the debtor to pay the loan as agreed. This being behind in payments or falling behind in payments is also known as being in default. It is important to know though, that a foreclosure can occur in in any type of loan that uses collateral; in cases other than real estate the foreclosure is also known as repossession, and this is a term usually associated with cars, bikes, boats, and other types of vehicles and property.
Anyone who has taken out a loan of any type that uses collateral–a secured loan–should be aware of what a foreclosure is because it can affect them directly. Individuals who have unsecured loans or who do not have any type of loan do not have to worry about repossession or foreclosure, generally. A secured loan uses some type of property of value as collateral to make sure the loan gets paid in accordance to the agreed upon terms. In many cases, the item the loan is for is the collateral; for instance, in a mortgage the home being purchased with the loan funds is held by the mortgage company as collateral. In other cases, such as personal loans and the like, another item, such as a vehicle that has no loan on it, can be used as collateral. In such cases if the loan goes into default the lender will take the collateral item to make them whole.
Foreclosure is a process, and can take upwards of a year and a half–in the case of real estate–to finish. Foreclosure proceedings begin after a prolonged time of nonpayment on an account. In the case of real estate, foreclosure proceedings can begin after 90 days of nonpayment on a mortgage, and finish after the paperwork required by state and federal laws is complete and the residents have been removed from the premises. Many times during a foreclosure the property is put up for auction and the mortgagors are able to bid on the property, but seldom are able to purchase their property back. Most times the mortgagors let another party purchase the property and they find another place to live.
In the case of a repossession, for example of a vehicle, the party in default has the opportunity to make their back payments and get “caught up” on their loan before the vehicle is repossessed, but if they are unable to do so the lender will take the vehicle; after such an event, the party in default may still have some options to get their loan current before the vehicle is permanently lost to them and their credit is severely damaged because of the event.
Foreclosure is a lengthy legal process that only occurs when a person with a loan fails to make the proper payments on the loan. After a specified amount of time where the mortgagor has not made payments, the mortgagee will begin the process by which they will take possession of the property in question. Those who have mortgages or other forms of secured loans should be aware of the foreclosure and repossession process, how it affects them, and how to avoid it.
Carl is a freelance writer. He enjoys writing about money, finances, and other economic issues.
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